Managed muscles flexed

Orchid Pub Company, the operator of around 300 managed pubs, has launched Project Daisy at its independent locals division.

Around 18 of its pubs are undercutting opposing pubs on drink prices by 20%.

The scheme is a naked attempt to grab market share by using its buying muscle to the detriment of those operators who lack its scale. The thinking derives from a Harvard School of Business academic paper that found a price differential of 20% really makes customers sit up and notice. For the price-cutting strategy to work it needs to drive volume.

In other words, customers of other pubs will have to switch their custom to Orchid's pubs. The common sense of this is that it will be primarily tenanted pubs that will be disadvantaged. It prompts a bigger question: are managed pubs more generally using their muscle to wrest market share from a tenanted sector showing real signs of distress? Managed operators themselves believe so.

Mitchells & Butlers (M&B) thinks there is a 40p-a-pint differential, for example, in its favour on a standard pint of lager compared to the average tenanted pub. Chief executive Tim Clarke is convinced the duty hikes caused another twitch in favour of scaled-up managed operators, which are pretty much able to hold prices.

There's a senior City analyst who argues that really difficult trading sorts out the men from the boys. That benign trading allows the vast majority of operators to do OK or better. When, he argues, things get tougher, a marked gap appears between the well-positioned and well-invested, and those who have ridden the good times without making the adjustments required to out-perform when consumers find themselves having to count the pennies.

Last year's credit crunch, a crisis largely played out in the financial markets, was the prelude to a fairly severe re-adjustment in the real economy. Consumers are finding that lots of things are costing more, just as they realise that their houses are worth far less than they thought — it's a powerful double whammy on willingness and ability to carry on spending in the same way. For those operating pubs, the problem of consumers looking to spend less arrives as costs are rising at a rate not seen in living memory. Tony Hughes, the man who used to run M&B's restaurant division, tells me he thinks sales have to increase by 5% to 7% for companies to stand still in profit terms.

Batten hatches​

The reality, though, is that any company achieving flat sales year-on-year is doing quite well. Two weeks ago, analyst Mark Brumby stuck his neck out and claimed the average pub company tenant is facing a swingeing 90% drop in profit to a measly £3,000. Brumby borrowed the profit-and-loss account of the "average" tenanted pub operator as provided by Enterprise Inns each November as the starting point for calculations.

Whether his forecasts are accurate or not, they are a reminder of realities bearing down. The next 12 to 18 months is likely to be an exercise in holding your breath. The largest managed companies are confident they can outperform by holding prices, maintaining standards and chopping out as much cost as possible.

Greene King, for example, is adopting a pretty savage approach to costs across the board. One multiple leased operator, who reports trading is "trying" in the extreme, believes lots of opportunities will appear in the coming year as distress takes its toll. In the meantime, and for now, it's a time to batten hatches to ride out the storm.

Luminar has its finger on the 90p-a-drink nuclear button​

There's discounting and there's discounting. Nightclub king Stephen Thomas warns that his company, Luminar, might have to start discounting more if others don't stop. He points to the possible advantage of reducing drink prices by up to 30% if others don't stop heavy discounting.

It looks like the company's Oceana outlet in Leeds, Life in Wellingborough, Liquid and Envy in Rotherham and Liquid in Mansfield are blazing a trail.

Oceana, for example, is offering 80p admission and 80p drinks on a Thursday night while Life in Wellingborough is offering drinks at 90p all night on a Friday.

Discounting is margin sacrifice — you choose to sacrifice some margin to drive greater sales. JD Wetherspoon's entire business model is based on margin sacrifice. But offering drinks at 90p each amounts, in my view, to a kind of discount nuclear button.

If you offer drinks at 90p each on a Friday you will suck all of the business in say, Wellingborough, into your venue. It will certainly drive vast amounts of business when customers can buy 10 pints for less than £10.

But an offer like this leaves you with absolutely nowhere to go.